NEW DELHI, Feb 13 (Reuters) - India posted its second
highest ever monthly trade deficit of $20 billion in January as
imports surged to record highs, piling pressure on a widening
current account deficit and limiting scope for the central bank
to cut interest rates.

Struggling to turn around an economy that is slowing to its
lowest growth rate in a decade, the Reserve Bank of India cut
interest rates by 0.25 percentage points last month, but warned
that future rate cuts would depend upon declines in both the
current account deficit and inflation.

But there was little sign of any respite on the external
front for Asia's third largest economy in December as a surge in
imports dwarfed a slight improvement in exports.

Exports rose an annual 0.8 percent to $25.59
billion in January, the first time they have risen since the
start of the fiscal year in April last year, on the back of
better sales of engineering goods, drugs and gems.

But imports rose 6 percent to $45.58 billion,
according to a senior trade ministry official, their highest
ever monthly total. Imports of oil, the single biggest item,
rose 6.9 percent from a year ago to $15.9 billion.

"The oil import bill is definitely a challenge, but for a
growing economy, energy needs have to be met," Commerce and
Industry Minister Anand Sharma told an industry conference in
Mumbai.

The January trade deficit was the second worst on record.
The worst figure was $21.9 billion posted in October.

Current account data for the October-December quarter will
be released at the end of next month, but the deficit touched a
record high in September at 5.4 percent of GDP due to slowing
exports and heavy oil and gold imports.

NEW PRESSURE ON THE RUPEE

The Reserve Bank of India is worried that India's ability to
fund its rising current account deficit is becoming increasingly
stretched, and could lead to fresh pressure on the rupee.

"The high current account deficit is unsustainable as it
can't be funded for a long time with capital flows and it will
get adjusted through the exchange rate," said A. Prasanna,
economist, ICICI Securities Primary Dealership. "The exchange
rate will depreciate when the correction happens."

The Indian rupee struck its weakest in over a month
in early January at 55.38 to the dollar, but has since recovered
on capital inflows. The rupee strengthened marginally
to 53.84 to the dollar after the data, as some traders had
priced in an even wider trade deficit.

Exports between April and January fell 4.9 percent to $239.7
billion, pushing the cumulative trade deficit for the first 10
months of the fiscal year to $167.2 billion, up 8 percent on the
same period a year earlier. Sluggish demand from the United
States and Europe has crimped India's exports.

Samiran Chakraborty, an economist at Standard Chartered Bank
in Mumbai, said the trade deficit's deterioration in January was
a concern, as it would typically be expected to improve during
the January-March quarter, but a surge in gold imports in
anticipation of a recent import duty may have been a factor.

The government did not detail imports of gold, usually the
second-biggest item.

On Monday, Reserve Bank of India Governor Duvvuri Subbarao
reiterated concern over financing the current account deficit
with volatile capital flows. Portfolio inflows into India have
been robust, with $8.34 billion so far this year after inflows
of $31.41 billion in the whole of 2012.

Subbarao projected a record high current account deficit for
the 2012/13 fiscal year, ending in March. Many analysts expect
the deficit to rise from 4.2 percent of gross domestic product
in 2011/12 to a record 4.5-5.0 percent of GDP for 2012/13.
(Additional reporting by Neha Dasgupta and Shamik Paul; Writing
by Suvashree Dey Choudhury; Editing by Tony Munroe, Simon
Cameron-Moore and Ron Popeski)